Gold News

Gold Ends London 0.7% Higher as Oil Rises, But the Gold-Oil Link Still Misleads Investors

Gold Prices closed London 0.7% higher on Thursday, trading above $767 per ounce as US stocks slipped and Treasury bonds dipped after a surprise up-turn in US housing sales.

Last week's initial jobless claims were 3.4% greater than forecast, and Durable Goods Orders dropped 1.7% in Sept. from August said the US Census Bureau.

But New Home Sales rose by nearly 5% month-on-month according to new data out just after the Wall Street open, defying consensus forecasts of a 2.5% fall.

Denting hopes of a rate-cut by the US Federal Reserve when it meets next Weds, the data also capped a rally in the European single currency, which topped out for the day just shy of a new record high against the Dollar.

"We expect a correction over the coming month, though good support should emerge at the $750 mark," notes David Thurtell at BNP Paribas.

"The Gold Market has held above the $760 mark as the Dollar remains weak and oil prices surge back close to record levels.

Crude oil rose for the second day running this morning, with Brent crude traded in London hitting a new all-time high above $85.50 per barrel.

US light crude for Dec. delivery rose by 1.4%, while the Gold Market for immediate delivery recorded a PM Fix of $767.50 per ounce in London, the highest price set for the bulk of commercial gold dealing since Friday.

But the link between crude oil and Gold Prices remains weaker than many investors and analysts believe.

Based on the last 3 years of weekly prices changes, notes the World Gold Council in its latest Gold Investment Digest, the correlation between gold and oil rose to 0.37 this summer, up from 0.36 in spring '07 and well above the 0.21 correlation recorded in the third quarter of 2006.

A perfect move in tandem, however, would show a correlation of 1.0.

Gold Prices also displayed a greater correlation with the broad commodities market (0.47 vs. the CRB Index; 0.58 vs. the DJ AIG Commodities Index), and gold's correlation with crude oil was not much greater than its apparent link to high-yield bond prices.

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On the economic front, meantime, the US earnings season rolled on today, with results out from Black & Decker and Motorola before the opening bell. Microsoft, the software giant, will report its Q3 numbers after the close tonight.

"The Dollar remains under pretty broad-based pressure," reckons Russell Jones, head of fixed income & currency research at RBC Capital Markets.

"It's increasingly likely that the Fed will move next week. There is growing speculation that it could even cut 50 basis points [to 4.25%] and the fallout in the financial sector seems to be quite grim, too."

Merrill Lynch, the largest US brokerage, yesterday extended its third-quarter write-downs by $2.4 billion to $5.9bn thanks to losses on subprime and related-housing bond losses. (Read more about the Sub-Prime Losses Still to Come here...)

Here in London, Shell plc – the largest oil company in Europe – said underlying profits dropped by 8% between June and Sept., but it still beat analyst forecasts.

That helped the FTSE100 index shoot 1.3% higher by lunchtime, despite news that UK mortgage approvals fell by more than one-quarter last month from Sept. '06.

The British Pound also shook off the weak UK housing data, spiking above $2.0530 even after the Bank of England warned that "the financial system remains vulnerable to further shocks" following the turmoil that forced a bail-out of Northern Run – the first UK bank to suffer a run by anxious savers since 1878 – in early Sept.

Gold Priced in Sterling rose to a 3-day high above £374.80. For Eurozone investors wanting to Buy Gold Today the metal touched €537 per ounce, its highest level since the 17-month highs hit on Friday last week.

"While physical demand [for gold] has no doubt tailed off, it certainly has not disappeared and is very apparent on market dips," says the latest Refining Monitor from Mitsui, the international bullion dealer:

"It is important the physical community have sufficient time to adjust to a new Gold Price, in a similar manner to their acceptance of the mid-$600s last year."

The Monitor notes that Indian demand for gold was "constrained" in Sept., despite the Rupee rising to cap gold's surge against the US Dollar. "As a consequence of higher Gold Prices," the report goes on, "many refineries reported a notable increase in scrap metal returning to the market."

But looking ahead, "jewelry manufacturers are nearing their busiest period as the year-end holiday season approaches in India," say Mitsui's analysts.

"In addition, we are just over 2 weeks away from the festival of Diwali, which is a very auspicious time for Indians to Buy Gold."

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Adrian Ash

Adrian Ash, BullionVault Gold News

Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver and platinum market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

See the full archive of Adrian Ash articles on GoldNews.

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